Cracker Barrel Old Country Store Inc (CBRL) 2002 Q3 法說會逐字稿

Welcome to the CBRL group third quarter earnings conference call.

Today's call is being recorded and will be available for a replay starting today at 2 P.M.

Eastern Time and running through May 28 until 8 P.M.

Eastern Time by dialing into the toll-free number which is 888-650-3187, and entering confirmation code 410814.

Again, the replay number is 888-650-3187, and confirmation code 410814.

At this time, for opening remarks, and introductions, I would like to turn the conference over to the Chairman of the Board, Mr. Dan Evins.

Please go ahead, sir.

Thank you, Miss Angelica.

This is Dan Evins, Chairman of the Board.

As you might imagine, I'm situated here in our board room in a chair.

With me is Michael Woodhouse, our President and CEO.

Larry White, Senior Vice President, Chief Financial Officer.

And Jim Blackstock, our Senior Vice President and Chief Counsel, uhm.

My assumption is that you've all seen our release this morning.

We had another very good quarter, we think, and certainly an improved quarter.

That being said, I'll turn this over to Larry White and let Larry get into more of the details.

Thanks, Dan.

And thanks to all our listeners on the conference call and webcast this morning for your interest and participation.

Hopefully, everyone's had an opportunity to see this morning's press release which announced our fiscal third quarter results and provided an update on current trends and our guidance for earnings for the remainder of the fiscal year.

As a reminder of our policy and in compliance with regulation FD, that review or comment on earnings estimates made by other parties, nor do we provide continuing updates of or express continuing comfort with our own guidance and trends except in broad public disclosure such as we have done this morning.

We urge caution to our listeners and readers in considering the information on current trends and earnings guidance, the restaurant industry is highly competitive and trends and guidance are subject to numerous factors and influences that can cause future actual results to differ materially from those trends and guidance.

Some of those factors are described in the cautionary discussion of risks and uncertainties found at the end of this morning's press release and we urge you to read that language carefully.

The company assumes no obligation to update disclosed information on trends or guidance, and should we provide any updates after today, they will be made only by press release or in periodic filings with the SEC under forms 10-K, 10-Q and 8-K.

With that obligatory recitation of our disclosure policy aside, let's review this morning's good news.

For yet another quarter we think it's really good news.

Bottom line, we recorded diluted earnings per share for a third fiscal quarter of 36 cents versus 26 a year ago.

This was at the high-end of the guidance we gave in press releases during the quarter, where we said we expected results up to the mid 30s.

Summarizing our final results against our earlier expectations, sales and food costs were better than expected partly offset by higher labor and related expenses, and we did a minor year-to-date adjustment of our income tax rate from a previous 35.8% to our present expectation for the year of 35.6%.

That resulted in the rate for the quarter being at 35.2%.

We're especially pleased that once again, we posted positive results throughout our business.

And Cracker Barrel Old Country store and retail and Logan's Roadhouse.

We also disclosed that very strong sales trends thus far in the present quarter and we indicated our present guidance for EPS growth for the remainder of the present fiscal year.

Finally, we announced this morning that our board of directors has authorized an additional share repurchase program under which we will repurchase another 1.5 million shares of our common stock and open market trades made from time to time.

That's on top of over 5 million shares that we already have repurchased so far this fiscal year under prior authorizations.

With almost 100,000 shares remaining under those prior programs, plus the new authorization announced today, we have about 1.6 million shares that we are authorized to purchase, or about 3% of the shares presently outstanding.

Let's look at some of the details of the operating results.

Revenue in our fiscal third quarter which ended May 3 of 2002, increased 7.9% from last year's third quarter.

That's $505 million compared with $468 million.

The increase resulted primarily from positive comparable store sales and from new unit openings for both our Cracker Barrel Old Country Store concept and our Logan's Roadhouse concept.

Partly offsetting these gains was the reduced revenue effect of exiting our Carmine Giardini's Gourmet Market business at the end of the last fiscal year.

Cracker Barrel comparable store restaurant sales were up 4.7% from a year ago, an improvement comprised of 3% higher average check and 1.7% increase guest traffic.

That marks 11 consecutive quarters of positive comparable store guest traffic and 9 consecutive quarters of positive comparable store sales.

Achievements the company last accomplished in fiscal 1994.

Further more to, improvements were achieved in all eight of all of our regional, of our operational regions, and, uhm, for the quarter across all three-day parts, breakfast, lunch and dinner.

Let me remind everyone, these sales and traffic results were on top of an up quarter a year ago when we recorded a solid 4% comparable store sales increase.

We believe that our strong focus on operational execution and best practices is a key reason why we are continuing to enjoy these favorable trends.

We also think we benefit from having a concept with a strong customer perception of value, quality and downhome comfort.

During this last quarter, you may know we were named by restaurants and institutions magazine as the winner of their annual choice and chains consumer survey as the top family dining concept in America.

That marks 12 consecutive years that we have taken home the award.

To quote the magazine, this year's win is especially sweet for the chain's top management because it tells them their efforts to refocus and revitalize the brand are in line with consumer desires.

I'll also add that not only did we win the family dining category, but we ranked second overall among over 70 chains and all segments that were scored in the survey.

That's why we think our sales results have been so good.

Cracker Barrel comparable store retail sales in the third quarter also increased, coming in at 1.1% above a year ago.

We are not relying on novelty items and retail as we have done in the days of Beanie Babies and Big Billy Baths.

This quarter we saw gains in the rocking chairs that are so familiar to our customers in books, music CD's and cassettes, apparel and jewelry.

That's pretty broad-based.

Our easter lines were a little softer this year, however, [INAUDIBLE] programs result of a 2-week earlier timing.

Rounding out our comparable store sales increases, we're happy to report continuing positive sales and guest traffic trends at our Logan's Roadhouse concept where comparable stores recorded a 3% increase in guest accounts and a .4% higher average check for a total 3.4% third quarter nominal sales increase.

After some difficult results last fiscal year, we think the operational execution initiatives at Logan's are paying off and Mike Woodhouse will speak to some of our successful activities aimed at improving sales at Logan's in a few minutes.

During the third quarter we opened 6 new Cracker Barrel Old Country Store units and one new company-operated Logan's Roadhouse unit as well as one franchise Logan's.

We presently expect to open 6 Cracker Barrel units this quarter, of which two already have opened, for a total for the full fiscal year of 20 new Cracker Barrels.

Logan's has completed its development schedule for this fiscal year, and its next opening will be in August.

Since the beginning of the present quarter, there's been one more franchise opening for Logan's, bringing the total for the year to four.

As of today, we have 453 Cracker Barrel Old Country Store restaurants and gift shops in 41 states and 84 company-operated and 12 franchise Logan's Roadhouse units in 17 states.

Let's continue on down the income statement.

Store operating income for the third quarter was up 19% on a 7.9% revenue increase.

And store operating margins improved 110 basis points from 11.1% to 12.2% of revenues this quarter versus the year ago quarter.

Coincidentally, these improvements for the third quarter are the same as the improvements that we had in the second quarter, so our progress continues on the important front of improving operating margins.

Improvements compared with last year and cost of sales reflected lower food and retail costs at Cracker Barrel and lower cost of goods at Logan's.

Net commodity costs have been favorable in Cracker Barrel, with several items contributing, and Logan's benefited from favorable costs in beef and ribs compared with last year.

We were pleased with the beef situation this past quarter and even the near-term outlook, but we believe that there will be further pressure ahead.

Food costs management has continued to run well relative to targets in both concepts, and in Cracker Barrel was markedly better than a year ago.

And retail cost of goods sold has benefited primarily from lower retail freight and markdowns.

Labor costs was higher than last year in both Cracker Barrel and Logan's including among other things higher store management compensation including bonuses in both concepts performance has improved.

We also incurred the higher -- the costs of higher-than-expected claims costs development in workers' compensation for which we carry a large self-insured retention.

We are, however, beginning to see some better-than-expected cost experience with our self-insured group health plan.

Management of hourly wages relative to targets was good again this quarter, and hourly turnovers continued to decline in both concepts.

Hourly wage inflation for non-tipped employees dropped below 4% compared with a year ago at Logan's and was less than 2% at Cracker Barrel which marks continued improvement from where we've been.

Our other store operating expenses in the third quarter were favorable to a year ago, with both concepts benefiting from favorable utilities costs and from the leverage of the sales improvements that I spoke of earlier.

General and administrative expense was somewhat higher in the third quarter than a year ago, but the 30 basis point increase was less than we reported in the last two quarters.

Included in the higher rates were professional fees including some related to the tax rate improvement I discussed earlier, bonus accruals reflective of performance improvements, the effects of staffing and infrastructure changes not in place a year ago, and other miscellaneous effects.

Earlier this year, we adopted FAS 142, good will and intangible assets accounting under which we no longer amortize good will so that's a pickup compared with last year.

Interest expense in the third quarter was reduced by about half from a year ago, as we benefited from both lower interest rates and lower average outstanding borrowing.

During the quarter, you'll recall, we issued almost $173 million including filling the over allotment and zero coupon convertible notes.

I'm not going to go over that again since it was covered pretty thoroughly in press releases and public filings at the time except to observe that our increase in long-term debt this quarter was attributable substantially to the $60 million simultaneous share repurchase that we executed with the issuance of the notes.

Wrapping up the third quarter, net income of $20.6 million was improved 40.8% from $14.6 million a year ago.

Diluted earnings per share of 36 cents were improved 38.5% from 26 cents reported in the third quarter last year.

As I said earlier, this was at the high-end of our guidance of the mid-30s that we disclosed in press release updates during the quarter, and it was 2 cents higher than consensus has reported on first call.

Earlier this year, our Board of Directors authorized a new share repurchase plan under which we may repurchase up to 3 million shares of our common stock from time to time in open market transactions.

During the third quarter we've completed just over 2.9 million shares of that repurchase authorization. and our total share repurchases this year including those repurchases made simultaneously with the issuance of the convertible debt were just over 5 million shares, for an aggregate outlay of about $140 million, or just under $28 per share.

Partly offsetting that benefit, however, was the impact of more than 2.4 million shares issued under stock option exercises for total proceeds of $45 million.

Historically, we have had a broad-based stock option plan that awarded options to everyone from the officer group to our most experienced restaurant hourly employees, the par 4's.

Additionally, with our stock performing well this year, a large portion of our outstanding options have been in the money recently, also offsetting some of the effects of repurchases and our calculations of diluted earnings per share.

Finally, in this morning's press release, we updated our current trends and earnings guidance.

And again, urge you to consider the cautionary discussion of risks and uncertainties at the end of today's press release and to understand the inherent risks associated with trends, targets, guidance and estimates in a competitive industry such as ours.

We remind that you we assume no specific obligation to update this information other than in periodic filings with the SEC from time to time and also we will not offer any further guidance nor after today express continuing comfort with today's disclosure other than in public filings or by other broadly disseminated means such as press releases from time to time.

While we are less than three weeks into the fourth quarter, restaurant sales trends have continued to be strongly positive.

Quarter to date same store restaurant sales for Cracker Barrel Old Country Store have been up compared with a year ago by 6 1/2 to 7% including a higher average check of around 3% and guest traffic increases of almost 4%.

Same store retail sales have been up compared with a year ago by approximately 5 1/2 to 6%.

Logan's continues to have strong increases also with quarter to date running up approximately 3 1/2 to 4% which is more than accounted for by guest traffic increases because their average check actually is down somewhat from a year ago reflecting in part lower alcohol sales.

Again, however, I remind you that it's very early in the quarter and certain comparisons will become tougher as the quarter progresses.

Even so, we presently project that we should record solid sales gains again this quarter.

Our present earnings guidance which I'll discuss in a moment reflects Cracker Barrel comparable store restaurant sales increases generally in the 4 to 6% range and retail sales in the 4 to 5% range.

The present guidance also reflects Logan's generally in the 2 to 3% comparable store sales increase range.

Our present guidance for diluted earnings per share for the fourth fiscal quarter is in the low to mid 50 cents compared with 48 cents last year.

Let me remind you of two important considerations in last year's earnings.

First, that 48 cents to which we are comparing ourselves is after excluding the effects of certain charges we took a year ago, totaling 43 cents per diluted share.

Secondly, last year's adjusted 48 cents quarter benefited approximately 9 cents from a non-recurring 14th week that we have every five or so fiscal years.

This year's fourth quarter will be back to the normal 13 weeks.

Considering the benefit of that extra week a year ago, we believe that our guidance for this year in the low to mid- 50s reflects our present expectation for another strong quarter.

We're generally not in the practice of projecting line item details in our guidance, but I'll share with you that we presently believe we again can achieve some further improvements in cost of goods sold compared with last year, and we potentially see less pressure and possibly even some improvement in labor and related costs.

Store operating margins should improve again when the effect of last year's 14th week is eliminated, and detailed analyses of the effects of last year's fourth quarter charges and the 14th week are available in our fiscal '01 annual report in the footnotes on the selected financial data table and in the MD&A.

So we're reporting good sales and earnings results this morning.

We are at the high-end of our guidance range and we beat consensus by 2 cents.

And we're disclosing solid trends thus far this quarter along with positive guidance based on our present outlook.

Finally, we announced a new share repurchase authorization for another 1.5 million shares.

We believe all of this is good news for our shareholders and we're very happy to be reporting it this morning.

With that I thank you for your patience with my financial review.

And I would like to introduce Mike Woodhouse, our President and Chief Executive Officer, who has further remarks on operating trends and initiatives.

Mike?

Thanks, Larry.

Good morning, everyone.

And thank you for joining us this morning.

Pleased to be able to report another quarter of very positive sales trends and continued improvement in store operating margins.

So as a result for the second consecutive quarter, we reported earnings per share at the high-end of our range of expectations and we were 2 cents above the first call consensus.

As Larry said, in Cracker Barrel we saw the 11th consecutive quarter of positive restaurant traffic and restaurant sales were positive all across all geographic regions and across all day parts in each month of the quarter.

Easter was earlier than last year, uhm, but we experienced strong sales during Easter period and when we compared the week before and the week after Easter this year, with the equivalent weeks last year, we saw very strong increases.

We attribute this to a continuation of the heavier road travel around the holiday periods that we saw at Thanksgiving and Christmas.

Early trends in the fourth quarter are encouraging and various survey data suggest levels of highway travel during the summer vacation season will be higher this year; for example, vacationers are expected to stay closer to home and take more one-day trips.

The trip ticks published by the AAA up substantially in number and campground reservations are up substantially over last year.

With our interstate presence we believe that Cracker Barrel will benefit from this increased travel and our operational focus on speed of service and stacking the stores to handle higher volume should allow to us take advantage of the opportunity.

As an example of the ability to handle higher volumes, on Mother's Day, which is the highest volume day of the year for cracker barrel, same store sales were up close to 5% on top of a similar increase last year.

And the store with the highest volume on the day which was also the highest volume store last year was up almost 6% and served close to 3,000 meals on the day.

The positive restaurant sale trends in Cracker Barrel in the third quarter included the most successful in- store promotion we've ever run, this was Homestyle Chicken.

This is a new product and a great example of our strategy of promoting menu items that represent excellent price value, are familiar to the guests and can be described as comfort or homestyle food and, of course, give us a strong dollar margin.

As part of the menu strategy we're building a pipeline of seasonal promotional products and we identify these through a combination of internally generated ideas and external research and we, we are testing them thoroughly before we roll them out system-wide.

In the periods between the seasonal promotions we are running what we call focus items which are existing on-menu items with high appeal, strong margin, or easy-to-execute and are supported by menu inserts posters and table-tents.

Right now, we are running roast beef as a focus item and then we'll come back in June with our summer promotion which this year's barbecued ribs, together with some supporting items including a [INAUDIBLE] that we are introducing for the first time this year.

We expected softer Easter sales in retail this year because of the early holiday, and in the event we were a little bit ahead of our internal plan and our markdowns were slightly lower than we projected so we were pleased with the Easter performance.

Recent sales trends in retail strengthened considerably in the strong sellers currently are apparel and the new wide rocker that we introduced later in the fourth quarter last year.

We expect for the rest of the fourth quarter retail will benefit from the projected higher travel activity since travelers have a greater propensity to make a retail purchase of Cracker Barrel than the local guests do.

We are reinvolving our merchandise strategy to broadly appeal demographically and also to respond to research findings by adding more items below the $20 price point which we find is a critical price level for our guests.

At the same time, we are continuing the focus on nostalgic and traditional merchandise which has been successful for us during the past 2 years both in supporting positive sales trends and restoring the clarity of the brand.

Another resent success is the book on audio program which is popular with the guests who know about it but has been something a well kept secret because it has not been operations friendly for the stores so we've recently created a specific bonus program as an incentive for the stores to support the program and we've bought replenishment of the tapes and CD's in house through our distribution center.

As a result of this, volume over the last few weeks is up over 12%.

And we expect this to increase as we move into the summer travel season.

Because the tapes and CD's can be returned at any Cracker Barrel this program is ideal for travelers and creates a built-in reason for another visit to Cracker Barrel.

Full staffing is always a priority.

We continue to maintain full staffing in both the hourly and management ranks.

Staffing and labor scheduling are included in the best practice initiatives which we're rolling out again this year following the successful initial rollout last year.

This follow- through is intended to reinforce the use of best practices as a way of life rather than the one-time program and this time, it will be greater emphasis on setting and hitting store by store improvement goals for such metrics as table turn speed, hourly turnover and food and labor costs.

Management turnover is running at 23% year to date in Cracker Barrel compared with 24% last year and our hourly turnover continues to run over 20 percentage points below last year's level.

We've opened as Larry said 16 new Cracker Barrels so far this year, 7 aren't in the state and 9 off in the state and we're on track to open 4 more stores by the end of the year- by the end of the year.

So as reported before, fiscal 2002 stores as a group are performing better than the fiscal 2001 stores which in turn performed better than the 2000 store so we are see sequential improvement in our new store performance.

And the off interstate stores continue to perform well and are also outperforming the equivalent groups in the prior two years.

At Logan's, we're also very pleased with the positive same store sales trends which were only slightly below the second quarter which was helped by favorable weather this year.

The monthly level, April and May, were two of the softer months for Logan's last year so that strong fourth quarter trends to date may ease a little bit later in the quarter as we run against slightly stronger counts.

Priority at Logan's has been execution especially speed and friendliness in service and the positive traffic trends this year speak to the improvements we have achieved in executions through the High 5's program which we rolled out in the fourth quarter last year.

Building on that initiative, we are developing a broader best practices approach that will be rolled out at the beginning of next fiscal year and we'll focus on continuous improvement in operational execution.

In the past, alcohol sales have not been a major priority for Logan's and we believe this represents a real opportunity for incremental sales.

We are in the process of rolling out a new alcoholic beverage program featuring new made from scratch specialty drinks with new glasswear and backed by a full training program designed to promote sales through suggestive selling.

At the same time, we'll be promoting high awareness of the importance of responsible service of alcohol.

All of this will be supported by new point of sale material in the form of table tents and banners in the stores.

Management turnover at Logan's is running below 25% and hourly turnover continues to improve and is running a little bit over 10 percentage points below last year.

As Larry mentioned, Logan's benefited from favorable food costs in the quarter especially from beef.

And although we expect some renewed pressure on beef prices in the coming months, we have a calendar 2002 beef contract in place to provide ceilings for the remainder of the year.

Logan's has opened 9 company operated and four franchise restaurants so far this year which completes the opening plan and the new company restaurants as a group are performing well and as in Cracker Barrel, we're seeing sequential improvement in new store performance for each of the past two years.

And this reinforces our confidence that we can sustain profitable growth in Logan's over the long term.

In closing, I'm pleased to be able to say again that we have positive momentum in both businesses.

We have continued to see the benefits in sales and profits coming from the hard work of all of our employees in both concepts, the focus on execution, and the improvements in execution we've achieved and positioned both brands well to benefit from the opportunities afforded by the inherent strength of each concept and the current external environment.

So with another successful quarter behind us, we are looking forward to an equally successful fourth quarter.

And now I'd like to open up the call to questions.

The question-and-answer session will be conducted electronically.

If you would like to signal for a question, you may do so by firmly pressing the star key followed by the digit 1 on your touch-tone telephone.

We will proceed in the order that you signal us and take as many questions as time permits.

Once again, that's star 1 to signal for a question.

We'll take our first question from Howard Penny of Suntrust Bank.

Thanks very much.

I was hoping you could explain a little bit more detail about the labor costs and the lack of flow-through that you are seeing this quarter.

I know you alluded to better flow-through next quarter.

But maybe if you could provide a little bit more detail as to why you are not seeing the flow-through especially given the fact that your comment you said your hourly labor costs came down in the quarter.

Thanks very much.

Yeah, well the key areas, Howard, were management compensation including bonus expense in the stores, and -- and frankly, that's one that we like to pay because, uhm, the, the managers are doing a great job out there and deserve the bonuses that they're earning.

And uh, secondly, we have felt some continued pressure this quarter as we reported last quarter in workers' compensation claims development, which deals with prior years' workers' compensation claims.

We determined those, those accruals each year with an actuarial study done by an independent actuary and our development has been higher this year than was anticipated.

So we were actually seeing some signs that the current year's activity is a little better, but we're, we're dealing with some of these unexpected claims development issues.

I also pointed out just to restate it that on the other good side we're seeing right now some favorable indications in our group health plans.

We think that just the overall environment there means we are going to, over time, continue to feel a great deal of pressure in group healthcare costs and that's an area of important focus for us.

But presently, our claims activity has been pretty good.

So sequentially, what's changing for to you have a better outlook in q4?

Well, we're, uhm, we're expecting, first of all, it's a strong quarter for us, sales-wise.

So...

We'll expect some sales leverage.

We, we are hoping that we've handled the workers' comp. issues and have that behind us.

As I said, we're seeing some, some nice results in terms of our group health expenses and also continued good management of our other expenses.

I alluded -- and Mike alluded to good turnover performance.

That translates into more effective workforce.

We've been having a big focus in both operations, Cracker Barrel and Logan's, on such things as best practices initiatives and all that.

So we're really addressing a lot of the areas of labor expense, and we're hopeful that we're gonna start to see some improvement.

I don't, I still think it's going to be an area of pressure for us for some time.

But I think the near term outlook is [INAUDIBLE] little sequential improvement.

If I could just ask one more question, which is a little bit more of a philosophical question, you continue to use raise, use pricing as a way to drive your sales.

And historically, in years past that has gotten Cracker Barrel into a problem or has caused problems for the concept.

Can you talk about your pricing strategy and how you don't repeat what happened to -- in the past?

By being too agressive with price?

Yeah Howard, I'm not so hot to agree with the statement that we use pricing to drive sales.

We did get ourselves into trouble back in '97, '98, and as you know, we took a price rollback to correct some of that.

Since that time, we have been very, very careful to take pretty modest price increases not breaking any major price barriers and do them every six months or so.

So right now, what's interesting is, is that our check is running higher than the theoretical price increase would suggest.

Which we believe means that our guests are willing to trade up, they're willing to spend more because of presumably overall experience.

So we think, we think we're doing the right thing with prices but we're certainly not relying on prices to -- to uhm to make our numbers.

That's not the right way to do it.

Let me, let me talk -- 'cause I don't want anybody to have the wrong impression about our pricing activity.

This idea of people trading up is really important.

In Logan's, we haven't taken a price increase almost a year, and that was only about 6/10ths of a percent that we took then.

In Cracker Barrel, we took -- we'll soon be lapping increases that total 1.3% during the fourth quarter of last year, and since then we have only taken one increase which was about 8/10ths of a percent in uh, the um, in about February this year.

So we've been pretty modest with our price increases and the average check that you see really reflects, I think, the customers' selection and we view it as positive 'cause it goes along with continued positive restaurant traffic.

Thanks for your time.

Thank you.

Moving on to Chris from Morgan Keegan.

Hi, guys.

Congratulations on a good quarter.

Hey, mike, what are your plans for advertising?

I know that in the national market, you have utilized radio.

Do you plan to continue to use radio in this market and maybe increase it to other markets?

Are you speaking of Cracker Barrel or Logan's?

Cracker Barrel.

We're running radio against about a 1/4th of the system in Cracker Barrel.

We are running it where we are, we are efficient in terms of spending to sales levels in our core markets.

And we will continue to do that.

It's, it's, it's Cracker Barrel's a little bit of an unusual animal because of all the travel component.

So you can advertise to somebody in market A and they will end up eating at cracker barrel in market B. A little bit difficult to measure but overall, we think the, the, the advertising campaign that we have which is a brand strategy is part of this continued positive traffic trend.

So we expect to keep going on that and we are using radio also to support our new store openings where it's appropriate and where it's affordable, and we pay more attention these days in our development plans to advertising efficiency so we don't put new stores out there in places where we can't support them.

I'd add to that, that we are getting good sales numbers in our non-advertising markets, too.

The advertising is, is not specifically what's driving the sales performance that we reported today.

Sure.

Uhm, one last question.

You know, you mentioned that you had in the pipeline some additional menu initiatives similar to the Homestyle Chicken.

Could you talk about some of the timing and some of the specific products?

Uhm, and also, could you quantify the preference that you have seen for the Homestyle Chicken?

Uhm, the -- well, on the seasonal promotional strategy which is what Homestyle Chicken was part of basically, we are creating 5 seasons.

Four regular calendar seasons plus a holiday season around Christmastime.

We would prefer not to discuss specific product promotions in the future in general.

We just think that from a competitive point of view, we have some great ideas and we just don't want to share those until they're in the stores.

And the same thing on the -- on the, uhm, preference.

The factoid that we have on chicken was that in the first four weeks, we had it out there we sold over a million portions of it.

We had one customer that wrote us and told us that in that four weeks, he had had it 19 times.

My word!

He's one of our heavy users!

[ laughter ]

Thanks, guys.

Thank you.

Moving on to Mike -- I'm sorry, Mark Sheridan of Johnson Rice.

Yeah, just a couple of, uhm, follow-ups to earlier questions and then a, then a, a question of my own.

One, Larry, you talked about labor in the third quarter and on the workers' comp. side, hopefully you've gotten some of those things behind you.

So with some of the pressure in the third quarter on workers' comp. catch-up rather than normal levels of workers' comp.?

[INAUDIBLE] What it was, Mark, is, again represents unexpected development from prior years.

We, we did some work during the quarter to try to get things cleaned up and found that we did have claims that were under-reserved and that was a, a big part of it.

So we are accrued for those prior years to what we think is the appropriate accrual level.

And we would expect to see things getting better.

That's where our hope and guidance is for the fourth quarter.

And then Mike, on pricing, you know, when you too- when you lapped the 1.3% price here in the fourth quarter at Cracker Barrel, is there anything planned as you lap that?

Uhm, I guess first of all, the same answer as on the promotional products.

We prefer not to share our pricing plans with the world.

But part of the strategy we've had is to always have on the shelf the next price increase so we are not waking up one day and saying we have to increase prices tomorrow.

So we have on the shelf at any point in time the next round of price increases thought out, ready to go to the printer.

So we can pull the trigger at any point and we will continue to do what we have been doing, which is modest price increases, don't break any price barriers, do not rely on any given product over and over again, and do them relatively frequently.

And lastly, Mike, just a question related to a comment you made about average volumes, you know, at the core Cracker Barrel restaurant concept average volumes have been running below same store sales for some time now and here in the third quarter there was quite a reversal.

I know you talked about sequentially the store opening plan this year, you know improved and last year had improved on the prior year.

But, you know, it seems to have been more dramatic recently.

Can you comment on -- on or is this just that there's, you know, incrementally just that many more stores that in the average volume calculation but not in the comp store sales calculation?

Because, you know, it's, it's, you know, again, it has lagged for a while and it was decidedly better here in the quarter.

And I'm sorry, you might have said this part on your call.

In addition to that, kind of the mix of on interstate versus off interstate stores this year and kind of planned going forward?

Yeah.

Uhm, Mark, actually, at least for -- I didn't go back and i don't remember specifically the numbers prior to last quarter, but last quarter, the new store group was stronger than the comp store group as it is this quarter.

So it's not a, a new phenomenon.

But we are pleased with the way the new stores last year -- but especially this year.

We've, we've got some really strong new stores that opened this year.

And, we talked about this before but we, over the last two years we really refocused on the, on the whole site selection process and quality of new sites.

And it's paying off in terms of the kind of volumes we are getting.

On the on/off interstate, we are 9 off, 7 on so far this year.

Our strategy continues to be that we only go off interstate in our core markets because we don't want to be out there in markets where there is lower awareness and not being able to support or not having the initial high volumes that we really want from the these stores.

Roughly 50/50 on and off.

Comes out of that strategy.

But we will continue to move that around year by year.

We think off interstate are an important part of the future, but we want to be very careful that we don't overextend ourselves in that area.

But as I said, the ones we have opened this year have been extremely strong.

Thank you very much.

Thank you.

Our next question will come from Amy Green of Avondale Partners.

Hi, guys.

I just wanted to ask you about what your development strategy is going to be for Logan's going forward now that you are seeing such strong growth for it and just wanted to see what your opinion was, if you were going to be ramping up the development schedule or opening new, a- additional new stores.

Yeah, we, we, we slowed down Logan's this year, somewhat similarly we [INAUDIBLE] as we, as we were just getting everything squared away, operationally and we feel pretty good about the performance now.

So we'll start ramping it up.

Our initial goal at the time of the acquisition was a 20% unit growth number for Logan's and that's what we are heading back towards and expect to be there a couple of years out.

Okay.

So not, not ramping immediately back up to that in next year but look out for it --

We'll be opening more next year than this year on our way to a 20%, number say two years out.

Okay.

Thanks, guys.

Thanks.

Again, if you have a question for us today, please press star 1.

Moving on to Brian Elliot of Raymond James.

Good morning.

A couple questions.

By way, I'm glad you got my chicken letter.

[ laughter ]

But a couple questions.

On the labor which I know you have talked a lot about I just want to clarify a couple things.

Larry.

You mentioned that you used the term sequential improvement.

I wanted to clarify what you meant by that does that mean you would expect less basis point increase in q4 or are you talking about improvement from the standpoint of year-over-year lower labor cost ratio?

The latter, I think.

Okay.

So that's a significant major trend change, then.

You talked about workers' comp. being a major factor there, so we had some workers' comp. catch-up last quarter, q2.

We had some more q3.

So is it correct to interpret, then, a, a sort of highly confident position that -- where, uhm, you know, sort of fully accrued and we are just going to go forward on a more normal base with that cost item?

We believe we are fully accrued and I think we've expressed a lot of confidence.

You worried me when you use words like highly confident.

Sounds like we're doing a deal here!

[ laughter ]

No, I think we, we've expressed pretty clearly we have a positive outlook on a lot of fronts here for the coming quarter.

And, uhm, I don't know if I can much more specific than that.

No, that's fine.

That's very helpful.

On the, another obvious piece of it is the store level of bonuses.

This is only really the second quarter of significant EBIT margin increases.

I'm really not sure exactly what the bonus parameters are.

Are we a couple quarters away from lapping a big increment, uhm, in that line item or are we getting, are we gonna see -- did we see bonuses rise on sales rather than, you know, on margins?

Well, there are different components.

The, and they're different components in both businesses.

The primary bonus program is based on operating income at the store level.

Where the store management teams at, at Cracker Barrel share in a percentage of that, that operating income.

Okay.

So given that then, okay, that's helpful.

Last question, is a little more big picture, as well.

You just talked about Logan's, uhm, expansion plans, uhm, longer term, uhm, uhm, could you, uhm, talk a little bit about where your thinking is with respect to, uhm, sort of sustained longer term growth outlook for physical expansion of the Cracker Barrel concept?

Yes, Brian.

We, uhm, we, we, we're opening 20 Cracker Barrels this is year.

Our plans are to open 25 next year and that is the level at which we would expect to continue unit growth.

We think that's a controlled, controllable, we can do it in the way we have done it this year in terms of quality of sites and strong, strong performance from the new stores.

So that's where we are going.

We see at that kind of level, uhm, we see Cracker Barrel expansion going on I won't say forever because nothing's forever but for a very long time.

Okay.

Very good.

I'm sorry I did have one other one.

The tax rate, where did you get the benefit?

And I assume it's sort of that's a forever until conditions change but just want to clarify that, as well.

Thanks a lot.

Yeah.

Uhm, basically, we've done some tax planning work here that -- where we see some opportunities that we're gonna be able to take this year and, uhm, we'll be reporting later as to what we think the outlook is for next year.

But it certainly isn't going to be any higher than this year.

All right.

Is it state taxes or can you help a little bit as to where you found the benefit?

Yes.

State taxes.

Okay.

Great.

Thanks.

Thank you.

we have one question remaining on our queue.

That will come from Dan Miscano of Kachs- Kachston Investments.

Hi, just wondering if you could quani- give us a little guidance on what will labor and related expenses without workers' comp. and management?

Were they down year-over-year or were they flat or can you give us some guidance on what the last two quarters look like?

Yeah.

Those expenses were more than accounting for our, our increases.

As I said, we've seen some good results in our hourly labor/management and we are beginning to see some at least for the near term some positive signs in our health expenses.

So without those, you would have been down year-over-year on a labor -- as a percentage of sales?

That's correct.

Okay.

Thanks a lot.

And as a final reminder, please press star 1 if you have a question. [ pause ]

And at this point, there are no further questions.

Gentlemen, I'll turn the conference call back over to you.

We would like to thank you for joining us this morning.

We enjoyed sharing good news and look forward to talking to you again at the end of the fourth quarter.

Thank you very much.

This concludes today's conference call.

Thank you for your participation and have a great day.